"As owner of 31 percent of Berkshire, Buffett would receive $310 million in extra income if the company decided to pay $1 billion in dividends next year; his tax rate would plunge to 3 percent, while the rate of Berkshire's receptionist would remain at 30 percent."posted by CrazyJub (51 comments total)

The Senate decided that the dividends an individual receives should be 50 percent free of tax in 2003, 100 percent tax-free in 2004 through 2006 and then again fully taxable in 2007.

amazing how the bloomberg article ignore the voodoo part of Buffet's piece: Why are the tax cuts on again off again, if they are so good for everyone? Steve Forbes should explain why if double taxation is bad in 2003 why it is good in 2007. Watching the enron accounting go untalked about by the press sucks, given how much they enjoy attcking CEO's.posted by tellmenow at 2:46 PM on May 20, 2003

It makes a lot more sense to let corporations deduct dividends, rather than providing relief at the taxpayer level. I'm sure this occured to GWB and the Republicans, but "he feared that Democrats would attack his plan as a windfall to the rich, but -- and this will come as a shock -- they've done that anyway"

dash_slot- are you implying the Buffett's motives are less than altruistic? I'm not to good at subtlety.posted by trharlan at 2:51 PM on May 20, 2003

trharlan: No, but it seems so over designed, so elaborate and specific, that I just thought "Hmm, when's Cheney/Rumsfeld/the cabinet due to get their dividends paid into their trusts?"posted by dash_slot- at 3:23 PM on May 20, 2003

Why are the tax cuts on again off again, if they are so good for everyone?

It's an accounting trick, for the sake of ten-year budget forecasts. It decreases the total cost of the tax cut (compared to a tax cut that has no expiration date). It might be for the sake of balanced-budget rules, or it might just be pure political sleight-of-hand; I'm not sure.posted by mr_roboto at 3:28 PM on May 20, 2003

mr_roboto: i know that it's a trick. How come Bloomberg Financial News doesn't? regardless of reason, the justification from people like Forbes is BS given the cuts go away in a couple of years. Buffet, and a scarce few other conservatives, are rightly calling for an honest discussion of the real costs, and real motives. Forbes is just spinning like the rest, and it's a shame that the most important part f what Buffet said gets ignored by the financial press.posted by tellmenow at 3:47 PM on May 20, 2003

What the fuck does that communist Warren Buffett know about economics? Hellooooo? Bush has it under control. Geez. Go back to Margaritaville.

See, I can't tell if that's an actual comment or a parody of ... well ... America.posted by jragon at 4:00 PM on May 20, 2003

Perhaps Mr. Buffet is worried about the future stability of the nation. He mentions in the article:

Both of us know we were lucky to be born in America. But I was luckier in that I came wired at birth with a talent for capital allocation -- a valuable ability to have had in this country during the past half-century. Credit America for most of this value, not me. If the receptionist and I had both been born in, say, Bangladesh, the story would have been far different.

He might think the reallocation of wealth to the upper classes threatens the stability of the society in which he dwells. As such, he might be willing to forego an additional 310 million in tax-free money in return for a more stable, more prosperous society as a whole.

That was beautiful, Hildago.
IMO, Warren Buffett is one of the more likable gazillionaires. He has always understood the importance of efficient market theory and the value of equal access to information for all players in the market. People like Bernie Ebbers only serve to tarnish everyone, including Buffett. Buffett seems to be one of the few people who is really willing to see things like tax cuts for their long term effects and not solely for personal short term gain.posted by anathema at 5:10 PM on May 20, 2003

That commie rag [/irony] The Wall Street Journal described this as making $440 billion worth of tax cuts fits into a $124 billion hole. They also noted that it was tricks such as expiring benefits that made this possible.

This was in the news section (the front page, actually). Back on the editorial page, I'm sure they were saying it was a great idea, if only those horrible Democrats would just shut up.

I love the WSJ's reporting. I loathe their opinions. Fortunately they seem to do a good job keeping them separate, unlike some "news" organizations cough Fox cough.

Yes, anathema, Buffett rules. Remember when everyone laughed because he just didn't "get" how technology was going to change everything?posted by pmurray63 at 5:13 PM on May 20, 2003

;-)))))

Osamilie? Or is that ((((;-)}}}} ?

Fortunately they seem to do a good job keeping them separate, unlike some "news" organizations.

Agreed. If we wanted Warren Buffett to run the economy (via FOMC, interest rates, etc), we would have elected HIM, not President Bush & Co.posted by davidmsc at 5:40 PM on May 20, 2003

Its rather disconcerting that the second richest man in America is arguing strongly against the proposed tax cuts, and he stood to make a profit from it.posted by Keyser Soze at 5:46 PM on May 20, 2003

we were lucky to be born in America-- W.Buffet

If you were not born when and where you were, you would not exist. No luck involved.posted by stbalbach at 5:52 PM on May 20, 2003

No, it's not "disconcerting" -- but it is misguided at best. Look at it this way: Warren has more than enough money to do whatever he wants for every day for the rest of his life. Tax cut or not, his lifestyle is not going to change. So, in a way, I'm sure that he feels his thoughts are somehow "charitable" or otherwise noble. That doesn't change the fact that he's wrong.posted by davidmsc at 6:43 PM on May 20, 2003

davidmsc: Why is Buffet wrong? Why would it be fair for a secretary to pay 30% of her income to taxes, making a huge impact on her life, while the super-rich would only pay a 3% tax rate? And even if the super-rich pay the same percentage as the secretary, how much impact will that have on his life, compared to the impact the tax rate has on her life?

But why is 3% for the filthy rich and 30% for the rest of us "not wrong"?posted by benjh at 7:18 PM on May 20, 2003

So, to recap: Investment genius Warren Buffett and most economists are wrong, George Bush and davidmsc are right.posted by Hildago at 7:48 PM on May 20, 2003

Now see, this is edumactional. Before I read those two articles, I didn't realize just how much of an ass-kissing moron* Steve Forbes really is, and how much more likely I would be to buy Warren Buffet a beer than Forbes, despite the fact that Buffet is about, what, forty times richer.

* and in fairness to morons and to pre-empt the "but he's still rich" crowd: If I were born with as much money as Forbes was, I hope to god I'd have at least as much as he does now, too.posted by yhbc at 7:49 PM on May 20, 2003

Proponents of cutting tax rates on dividends argue that the move will stimulate the economy. A large amount of stimulus, of course, should already be on the way from the huge and growing deficit the government is now running. I have no strong views on whether more action on this front is warranted. But if it is, don't cut the taxes of people with huge portfolios of stocks held directly. (Small investors owning stock held through 401(k)s are already tax-favored.) Instead, give reductions to those who both need and will spend the money gained. Enact a Social Security tax "holiday" or give a flat-sum rebate to people with low incomes. Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets.

When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party.

I'm confused. Rich people currently get their individual income taxed at a rate of nearly 40%. Dividend earnings are currently taxed at the 35 percent corporate income tax and are then, presumably, hit by the individual income tax, which has a rate of 38.6 percent for the rich. State and local taxation is piled on top. So dividend income will still be getting taxed at 45%-50% for the rich on an individual level. I don't understand this 3% stuff he's talking about – I wish he'd explain (anyone?).

And as for your snide comment, CrazyJub – Buffett is in the minority on this one when it comes to investors. Most of Wall Street thinks this will be great for the economy and the individual investor (but I'm sure that's because 99.9% of successful investors, Republicans, conservatives, etc. are evil, and care about nothing but themselves.)posted by BirdD0g at 8:19 PM on May 20, 2003

Interestingly enough, publications like the Economist agree with Buffet's assessment of the tax cuts lack of short term stimulus ability but disagree with his conclusions. The issue, at least in their view, is one of fairness -- a company that has paid corporate income taxes should not force investors to pay taxes on the same money again. In fact, the original draft of Bush plan actually reflected that view in that it covered only corporate income that had already been taxed.

To be honest, I haven't kept up with what's happened to the plan as its worked its way through Congress, but I understand its one something of a different path.posted by ph00dz at 8:24 PM on May 20, 2003

Most of Wall Street thinks this will be great for the economy and the individual investor.

Clarification: I'm talking about GW's plan here, not specifically the dividend tax relief. Even the experts don't seem certain as to what that will immediately do for the economy. Buffett is just one of the more opinionated investors on the subject. While I greatly respect his market intelligence, he is only a single man with a strong opinion. The general consensus on Wall Street, at least as far as I've seen, is that this will be a good thing.posted by BirdD0g at 8:37 PM on May 20, 2003

birddog, the dividends themselves are currently taxed, but they are not taxed again as part of standard income tax, nor are dividend earnings covered by the AMT. If the dividend tax were to be removed, then dividend income would effectively be tax-free. The reason the Bush administration touts it as a removal of double-taxation is because the corporate earnings are taxed, and then dividends are paid out of that pool of taxed money.

Thus, if you have significant dividend income as many wealthier people do, your tax rate could drop significantly as your dividend income would not be taxed at all. This is how you Warren Buffet could realistically end up in a 3% tax bracket, and many wealthy people could end up paying less than the 28% AMT rate.

If you want to help the economy, give the money to people who will spend it, not to people who will simply bank it.

My pet theory on the dividend tax cut is that it's just an obfuscated way to prop up the stock market by significantly increasing investment.posted by mosch at 8:51 PM on May 20, 2003

I'm confused. Rich people currently get their individual income taxed at a rate of nearly 40%. Dividend earnings are currently taxed at the 35 percent corporate income tax and are then, presumably, hit by the individual income tax, which has a rate of 38.6 percent for the rich. State and local taxation is piled on top. So dividend income will still be getting taxed at 45%-50% for the rich on an individual level. I don't understand this 3% stuff he's talking about – I wish he'd explain (anyone?).

Oh come on! Corporate income tax doesn't count, since corporations and their shareholders are distinct legal entities. Don't you ever wonder why people bother to incorporate their businesses and voluntarily subject themselves to corporate income taxes? The fact that people continue to incorporate in huge numbers proves that the liability protection afforded to shareholders far outweighs the cost of corporate income taxes.

Also, anyone who makes most of their income from investments is rich enough to establish residency in a state that doesn't have an income tax.posted by electro at 9:10 PM on May 20, 2003

My case is not atypical -- my earnings, like those of many rich people, are a mix of capital gains and ordinary income -- nor is it affected by tax shelters (I've never used any).

Well that's interesting considering the fact that when Buffett got into the investment business, he started buying enough stock in a little-known textile company called Berkshire Hathaway; enough to control the company but not enough to be considered a majority owner (I believe it was 49% at one point, but laws have changed). Why did he want Berkshire to buy a company rather than owning one himself? Because dividends paid between corporations are taxed at a lower rate than dividends paid to individuals. He was getting a lower dividend tax.

Buying companies and persuading them to reinvest their earnings rather than pay them out is another way he has avoided taxes. Every investment Buffett makes is structured in a way that minimizes tax exposure. Never used a tax shelter? Please.

If it weren't for the tax-friendey investments that Beffett has made over the years, he would be a millionaire, not a billionaire.posted by MarkO at 9:12 PM on May 20, 2003

Thanks, mosch. It all makes much more sense to me now.posted by BirdD0g at 9:26 PM on May 20, 2003

Every investment Buffett makes is structured in a way that minimizes tax exposure. Never used a tax shelter? Please.

That seems more like common sense than a tax shelter (but I guess they can be pretty similar). When people talk about "tax shelters", I think of Enronish stuff like this:

It's not clear precisely how the Ernst & Young shelters worked, but they likely involved the use of offshore trust accounts, limited partnerships involving family members and paper losses, and unsecured promissory notes.

The goal was to move option income between parties to sharply reduce and delay taxes. Then another series of transactions would appear to raise the cost of the options, which would wipe out the tax bill.

The shelter used by Esrey is still under review by the IRS. A year and a half ago, the agency discouraged similar tax-dodging strategies. Ernst & Young has maintained that its advice was legal.

I'm confused. Rich people currently get their individual income taxed at a rate of nearly 40%. Dividend earnings are currently taxed at the 35 percent corporate income tax and are then, presumably, hit by the individual income tax, which has a rate of 38.6 percent for the rich. State and local taxation is piled on top. So dividend income will still be getting taxed at 45%-50% for the rich on an individual level. I don't understand this 3% stuff he's talking about – I wish he'd explain (anyone?).

As already stated by mosch:

the dividends themselves are currently taxed, but they are not taxed again as part of standard income tax, nor are dividend earnings covered by the AMT. If the dividend tax were to be removed, then dividend income would effectively be tax-free. The reason the Bush administration touts it as a removal of double-taxation is because the corporate earnings are taxed, and then dividends are paid out of that pool of taxed money.

and as electro pointed out, the corporate tax shouldn´t have anything to do with tax on dividends, as the corporation and the stockholder are separate legal entities. It's a silly notion really, especially if you take into account the income tax paid by each and every corporate drone employee in the United States. Why doesn't Bush eliminate their taxes? Hasn't the corporation already paid corporate taxes (other than on dividends?), why should a McDonald's worker (a corporate employee) then pay income tax? Isn't that also double taxation?

The pro tax cut spin on this issue is really immoral.posted by sic at 5:01 AM on May 21, 2003

If we wanted Warren Buffett to run the economy (via FOMC, interest rates, etc), we would have elected HIM, not President Bush & Co.

Even foregoing the obvious comment that Bush wasn't actually elected by a 'we', unless davidmsc is a Supreme Court Justice, the course of the US economy over the last decade, through both boom and bust, proves that Americans' not wanting Warren Buffett to run the economy is a severe lapse of judgement.

As for the approval of 'Wall Street': well, turkeys will vote for cancelling Christmas. Any serious economist sees the tax cut as a gigantic turd in the US economic punchbowl.

It's the fact that so many Americans have been led to believe that they're part of the top 1% of earners, or that they're only a pay-rise away from becoming part of that 1%, which lulls them into accepting policies that are designed to enrich the corporate fat-cats who make up, and who bankroll, the Bush administration.posted by riviera at 5:32 AM on May 21, 2003

Not frequently mentioned in the dividend tax cut debate is the fact that it will apply also to privately held companies -- those that have no publicly traded stock. The effect at these companies will be to encourage more money to be taken out of the operation rather than being reinvested, and that will cut growth and job formation.

In the past, owner-managers of privately held companies have limited dividend payouts because of the double taxation problem. In addition, salaries have been somewhat limited to reasonable levels because the IRS has imposed its double-dip dividend tax when it sees extraordinary salaries being paid to owners.

With the elimination of the dividend tax, the owner-managers will be tempted (and encouraged by financial advisors) to take more money home, in the guise of diversifying their investments. Job growth will be cut. In theory, the cash taken out would be reinvested in other businesses or the stock market, but in reality much of it would go into jewelry, real estate, boats, mansions, bonds and other non-productive assets.

Even in publicly held businesses, the pressure to pay dividends will be increased, which cuts the company's ability to grow and create more jobs.posted by beagle at 5:56 AM on May 21, 2003

If we wanted Warren Buffett to run the economy (via FOMC, interest rates, etc), we would have elected HIM, not President Bush & Co.

Looks like davidsmc needs to retake Theology 101. Father Bush wasn't "elected": he was appointed by God.posted by eustacescrubb at 6:03 AM on May 21, 2003

Under Bush, America has become a country where the poor are fighting for the rights of the rich.

And if you bush apologists would just read the article, you would realize it's not just the tax cut he's trashing, it's the implementation of it.posted by CrazyJub at 6:14 AM on May 21, 2003

If we wanted Warren Buffett to run the economy (via FOMC, interest rates, etc), we would have elected HIM, not President Bush & Co.

davidsmc meant to say selected, not elected.

Elected is by the people. Selected is by Supreme Court judges nominated by your father.posted by The Jesse Helms at 6:20 AM on May 21, 2003

Buffett's example of what he would owe is wholly dependent on if Berkshire issued dividends. Much of his philosophy is based on investing in companies who reinvest in themselves (i.e. do not pay dividends). He himself does not benefit from this dividend tax cut nor will he since he in all probability does not receive a dime through dividends to begin with. Many others in his position would, however.posted by pedantic at 8:27 AM on May 21, 2003

davidmc has become conspicuously silent on this thread.posted by wsg at 9:36 AM on May 21, 2003

Well, I've got about $30K / year of dividend income coming in and if they reduce that tax no, I ain't gonna go on a spending spree.

How did I acquire enough capital to generate that much income? Simple answer : I currently and have always lived far far below my means (but comfortably!). I chose not to consume, or more properly, I consume sensibly.

And I'm not likely to change if all of a sudden that $30K cash flow is tax free. No, no way, no how.posted by Mutant at 11:33 AM on May 21, 2003

but you are not representative of the population as a whole...posted by websavvy at 11:53 AM on May 21, 2003

While I'm glad Buffett took his swipe at BushCo... well, I'm always suspicious when billionaires take populist positions. Call me a cynic. That said, though...

[Steve] Forbes said on CNBC that Buffett's opinion results from "guilt and part of it is a misunderstanding that the dividend income shouldn't be taxed twice."

Warren Buffett is the second richest guy in the world, but he doesn't understand about dividend income? Riiiight. If I were Steve Forbes, I wouldn't be criticising someone who makes WAY MORE MONEY THAN ME for not "understanding" something about the economy.posted by RylandDotNet at 11:55 AM on May 21, 2003

Buffett is yet another pansy liberal that's jealous of those richer than he. I betcha he's against SUVs, too, because he can't afford one.

He himself does not benefit from this dividend tax cut nor will he since he in all probability does not receive a dime through dividends to begin with. Many others in his position would, however.

Which is, of course, his point: that abolishing the dividend tax (for a small window) will make corporations hot for dividends, paying their embattled accountants ways to ensure that the old share-option tricks are replaced by dividend tricks. (The former being something that Buffett complained about years ago.)

Now, in a bear market, dividends certainly replace stock price rises as a way for shareholders to make money from well-run companies. But in a bear market, you'd also want to make sure that companies aren't diverted from capital reinvestment simply in order to take advantage of this 'MUST! END! SOON!' dividend sale. It's the kind of tinkering -- with its chief beneficiaries, those well-funded individuals who hold stock out of tax-protected accounts -- which is a recipe for economic turbulence. (And beagle has pointed this out, anyway.)posted by riviera at 4:09 PM on May 21, 2003

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